Most informed Michigan citizens
know that the revenue cap imposed by the 1978 Headlee constitutional amendment
limits state spending, taxes and fees. What these same Michiganians probably do
not know is that the Headlee limit looks increasingly unlikely to restrain the
growth of state government.

Passed in the midst of a
nationwide tax revolt, the Headlee constitutional amendment established that
"the legislature shall not impose taxes of any kind which, together with all
other revenues of the state, federal aid excluded, exceed" 9.49 percent of the
aggregate personal income of Michigan citizens in any given year. If revenues
overstep the limit by 1 percent or more, the state must prorate and rebate the
"overcharge" back to every person who paid personal income or business tax in
the previous year.

The revenue cap in dollar terms
has risen as personal income has grown. Some of that is due to inflation, but
much of the increase has a happier cause: Our society and most families are
wealthier now. Given the presence of a mostly free-market system and the rule of
law, this is not surprising. Despite attacks from those who hate or resent these
institutions, history shows that when allowed to flourish, free markets and the
rule of law always create more wealth and distribute it more widely.

There is lots of direct and
indirect evidence for this. For example, the increasing wealth of most families
can be seen in homeownership rates. In Michigan, even in its current economic
malaise, 77.1 percent of households owned their own home in 2004, up from 70.7
percent 20 years ago.

For aggregate personal income
growth we have direct evidence. In constant 2003 dollars, Michigan’s per-capita
personal income grew from the equivalent of $24,144 in 1977, the year of the
Headlee index, to $31,189 in 2003 — a 29 percent increase in real terms. Over
the same period, the state’s population rose from 9.20 million to 10.08 million.
These are the components that combine to determine the Headlee revenue limit.

So has Headlee restrained tax
and spending growth? The answer is an unequivocal "maybe." In its 26-year
history, the cap was exceeded just three times, and only once by enough to
trigger a rebate. In 19 of those years, revenue was at least $500 million
beneath the cap, and in 15 years, that cushion exceeded $1 billion. As a result
of Proposal A in 1994, $3.5 billion in school spending and revenue was shifted
to the state, and still there was enough cushion to accommodate this change
without triggering a rebate.

It’s impossible to definitively
conclude whether this history proves the cap was just too high to be effective,
or the opposite: that it held back legislators from tax and fee hikes they might
otherwise have passed. The cap might have been effective in another way, too:
Using personal income as the Headlee index gave the beneficiaries of government
spending a stake in economic growth, possibly inhibiting the adoption of more
economically damaging taxes and regulations.

Having said that, there is no
question that since 2001 the Headlee cap has "run away" so far from actual
revenues that it has become irrelevant. In 1980, revenues were $526 million less
than the maximum amount allowed, a difference equal to 7.1 percent of actual
spending. Fast forward to 2005: The revenue cap is $29.84 billion, and actual
revenues are $24.16 billion. This means Lansing could raise taxes and spending
by $5.67 billion, or 23.5 percent, without bumping against the cap. This
would translate into a tax increase of more than $560 on every man, woman and
child in the state.

Alternatively, a Headlee
government revenue cap of 9.49 percent of personal income would limit taxes and
spending this year if the state’s per-capita annual income dropped by around
$5,930 ($17,790 for a family of three), or the state’s population fell by about
1.9 million and reduced total personal income proportionally. Both scenarios
seem unlikely.

Michigan citizens concerned
about the growth of state government need to look closely at the Headlee
amendment’s constitutional cap on state government taxes, fees and spending.
Perhaps it is working invisibly — but perhaps it is no longer very effective at
all.

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Jack McHugh is a legislative
analyst for the Mackinac Center for Public Policy, a research and educational
institute headquartered in Midland, Mich. Permission to reprint in whole or
in part is hereby granted, provided that the author and the Center are properly
cited.